Cryptocurrency investors poking their heads up out of their foxholes on Monday have just one question.
Is it over?
Crypto prices had edged up over the last 24 hours following last week's slaughter where the market, by some estimates, lost almost $200 billion.
The Fed's Role
Bitcoin was essentially flat on May 23 at $30,420.63 at last check, according to CoinGecko. Ethereum was off about one-half percent to $2,067.33, while dogecoin was down nearly 1% to $0.087630.
Last week's collapse came as stock prices cratered while the stablecoin UST, or TerraUSD, and its token sister Luna collapsed. Both are cryptocurrencies of the Terra ecosystem.
The question is now what? Frank Corva, cryptocurrency specialist with Finder, thinks the Federal Reserve has an important role to play.
"Whether or not the crypto correction is over is still mostly dependent on what the Fed does from here," Corva said. "If the Fed continues to aggressively raise rates and begins to roll anywhere from $47.5 to $90 billion off of its balance sheet per month beginning in June, then the crypto markets will likely continue to feel pain."
However, if the Fed becomes more dovish and doesn’t engage in such substantial quantitative tightening measures, Corva said, then crypto markets may bounce back.
"Crypto assets are often uncorrelated to equities in a risk-on market," he added. "In other words, crypto assets usually rise in price exponentially compared to growth or tech stocks in a risk-on environment."
However, in a risk-off market, Corva continued, crypto assets experience price pull backs similar to those of higher-risk traditional assets.
He noted that many high-growth tech stocks are trading over 50% off of their highs, while Bitcoin and Ether are both trading at just about the same discount.
Corva said that Mike Novogratz, CEO of Galaxy Investment Partners, who has lost millions in the crypto crash, said in a recent letter, “all investments happen in a macro framework.”
Right now, that macro framework is being heavily influenced by hawkish Fed policy, and crypto, as well as just about every other asset class, is at the mercy of said policy.
'Based On Nothing'
Crypto analysts say the sudden price drop will only increase the call for more regulation.
Winston Ma, managing partner of CloudTree Ventures, Author of "The Digital War – How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace," said that ”rising regulations in the US and Europe may lead to further volatility in crypto prices."
Ma said that European Central Bank (ECB) President Christine Lagarde said at the opening of the World Economic Forum in Davos, Switzerland that cryptocurrencies are “based on nothing” and should be regulated to steer people away from speculating on them with their life savings.
"Just two days before that, the G7 finance ministers and central bank governors convened and called for a swift and comprehensive regulation of crypto assets," Ma said. "This Davos week will see more crypto regulation discussions among government leaders, and it’s highly likely that the US will accelerate its stablecoin regulations in 2022, which has been called on by the Treasury Secretary Yellen for many months already."
Despite the collapse of crypto prices, blockchain and cryptocurrency firms have taken over the main street of Davos, according to Reuters.
Corva said that El Salvador’s President Nayib Bukele, an avid crypto enthusiast, and The Central Bank of El Salvador recently hosted 32 representatives from different central banks around the world and 12 other financial authorities from other countries this week to teach them about the benefits of Bitcoin. The event has been called "the Davos of Bitcoin."
Last year, El Salvador became the first country to make bitcoin legal tender.
“I think people initially thought all stable coins would fail because of Terra algorithm failing or being exploited which by the way had been identified much earlier that it could happen,” Travis Bott, CEO of Meta Labs Agency, said. “However you now see money flowing back into USDT and USDC, their prices stabilizing as well as crypto overall building back support lines.”
Bigger Trend Towards Regulation
That doesn’t mean we have seen the bottom yet, Bott said, "as we could still see lower prices as we move through the cycle towards the next halving."
"However if people use sound principles like cost average buying and not over allocating into the market they will still find great opportunities for upside over the next years as the crypto market continues to strengthen and broaden its adoption," he said.
David Lesperance, managing partner of immigration and tax adviser at Lesperance & Associates, said he believes "the bigger trend towards regulation is going to clean out a large number of crypto coins and NFTS which will not pass muster in a regulated environment."
"The fallout from the collapse of TerraUSD/Luna continues to reverberate, he said. "Now the spotlight is on the standards that crypto exchanges use in listing new cryptocurrencies and continuing the trading of disgraced previously listed coins."
Lesperance said that fierce competition among exchanges has led to a sharp rise in the number of tokens available on platforms that are popular with adventurous but naive investors.
"Major exchanges, including Coinbase, Binance, OKX and Crypto.com, which previously let their customers buy Terra or linked tokens, halted trading during the crisis," he said. "Most jurisdictions have little if any legal standards on what crypto tokens can be publicly listed for regular people to trade, so exchanges serve a key role in scrutinizing coins."
Lesperance said the scrutiny on what standards exchanges apply when they decide to list a coin comes as the strategy of adding more coins to drive growth shows signs of faltering.
"Up till now, it has been the decision solely that of the exchange but look for regulators to come in hard and fast in imposing new standards... and liabilities for failing to live up to that standard,” he said.
